2025 (10) TMI 896 - AT - Income Tax

Addition under section 56(2)(x)(b)(B) deleted; section 32 depreciation and section 40A(2)(b) rent issues remitted for AO verification and hearing

ITAT MUMBAI - AT deleted the addition under section 56(2)(x)(b)(B), granting the assessee the 10% tolerance between stamp duty value and consideration and ... Addition u/s. 56(2)(x) - difference between the purchase consideration and the stamp duty value - It is important to note that the preliminary valuation assigned by DVO which was affirmed by the DVO himself in his final valuation report, there being no difference in the valuation in the preliminary report and the final report - difference between the stamp duty value as per the ld. DVO and the actual purchase consideration comes which is less than the prescribed limit of 10% u/s 56(2)(x)(b)(B) - HELD THAT:- In the case of Maria Fernandes Cheryl [2021 (1) TMI 620 - ITAT MUMBAI] it was held that amendment made by introducing proviso for tolerance band of 5% and later on increased to 10% applied w.e.f. 01.04.2003 when the provisions of section 50C were introduced. It is also noted that third proviso to section 56(2)(vii) provides reference to section 50C for determining the valuation of the property by Valuation Officer. The third proviso to section 50C provides that where the value adopted or assessed or assessable by the Stamp valuation Authority does not exceed 10% of the consideration received shall be taken as full value of consideration, i.e., if the difference is less than 10%, the same can be taken as fair market value. Though this provision is brought in the statute w.e.f. 01.04.2019, however, Courts have consistently held that the same is a beneficial provision and therefore benefit should be given with retrospective effect. Thus, we find that assessee is eligible for 10% tolerance limit u/s. 56(2)(x)(b)(B). Accordingly, the addition made by the AO is deleted and we uphold the findings arrived at by CIT(A) to this effect. Accordingly, grounds raised by the Revenue are dismissed. Disallowance of depreciation u/s. 32 as held that the asset was not put to use, since it was under a passive use for carrying out interior work by the assessee - AO disallowed the same as according to him, the property was under passive use for carrying out interior work - CIT(A) sustained the disallowance so made, though ld. CIT(A) made an observation that if possession is taken then, the depreciation should be granted. He took an adverse view on account of the fact that no letter of possession was produced by the assessee - HELD THAT:- Claim of the assessee is that subsequently this flat has been sold in AY 2023-24. While reporting capital gain on this transaction in AY 2023-24, assessee has taken the Written Down Value (WDV) at a lower figure, i.e., after the claim of depreciation in the year under consideration which has been accepted by the Department. We note that in the course of assessment proceedings, AO made an attempt to enquire about the details of transaction of purchase of flat by the assessee from India Bulls Properties Pvt. Ltd. by issuing notice u/s. 133(6) to which AO did not receive any response. No further verifications were undertaken by the AO in this respect. Also, the acceptance of capital gain on sale transaction in the subsequent year of AY 2023-24 by the Department is not in consonance with the stance taken by AO while making the disallowance of the depreciation in the year under consideration. In these given set of facts, we find it appropriate to remit this particular issue back to the file of ld. Assessing Officer for the limited purpose of verification about possession taken by the assessee and treatment thereof. Needless to say, assessee be given reasonable opportunity of being heard and to make any further submission, if so required. Addition made towards disallowance of rent paid of Rs. 20,000/- by invoking provisions of section 40A(2)(b) - There is nothing brought on record to demonstrate that the rent paid has been in excess as required u/s. 40A(2)(b) without making any independent examination/verification by the ld. Assessing Officer. In the given set of facts, we find it appropriate to remit the matter back to the file of ld. Assessing Officer for the limited purpose of verification of documentary evidences, so as to objectively arrive at any excess payment of rent u/s. 40A(2)(b). ISSUES PRESENTED AND CONSIDERED 1. Whether reliance by the appellate authority on the District Valuation Officer's (DVO) preliminary valuation report is permissible when the DVO's preliminary and final reports record the same valuation, for purposes of applying section 56(2)(x) tolerance band? 2. Whether the tolerance band applicable under section 56(2)(x)(b)(B) for discrepancy between stamp duty value and consideration is 10% (post-Finance Act, 2020) and whether that 10% band applies retrospectively to the assessment year in question. 3. Whether depreciation under section 32 is allowable where the assessee undertook interior works after registration and claimed depreciation on the property, and whether the asset was 'put to use' (possession taken) for allowing depreciation. 4. Whether an incremental rent payment to a director (increase from earlier agreement) is disallowable under section 40A(2)(b) as excess payment, absent independent verification/documentary proof. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Reliance on DVO preliminary valuation report where preliminary and final valuations are identical Legal framework: Valuation for purposes of section 56(2)(x) may be referred to the Valuation Officer / DVO; factual valuation records (preliminary and final) form the basis for comparing stamp duty value and consideration. Precedent Treatment: No new precedent was overruled; the Tribunal accepted the factual equivalence of DVO preliminary and final reports and relied on the DVO's valuation for adjudicatory purposes. Interpretation and reasoning: The Tribunal examined the record and found that the DVO's preliminary valuation and final valuation were identical (both stating Rs. 8,73,87,000). Where there is no material difference between preliminary and final reports, reliance on the valuation figure is a verifiable fact and does not amount to improper reliance on a non-final document. The appellate authority's reference to the preliminary report was an inadvertent phrasing; substance shows reliance on the DVO valuation figure confirmed in the final report. Ratio vs. Obiter: Ratio - where preliminary and final DVO valuations are identical, the valuation figure is properly relied upon for applying section 56(2)(x). Obiter - none added on broader admissibility of preliminary reports where differences exist. Conclusion: Ground challenging reliance on the preliminary report fails because there was no difference between preliminary and final DVO valuations; the appellate finding stood correctly on the DVO's valuation. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability and retrospective operation of 10% tolerance band under section 56(2)(x)(b)(B) Legal framework: Section 56(2)(x) (as it stood prior to and after amendment) prescribes treatment when stamp duty valuation exceeds consideration. A tolerance band/proviso limits treatable differences; Finance Act, 2020 amended the permissible variation to 10% w.e.f. 01.04.2021. Third proviso to section 50C (and cross-reference in section 56) addresses when stamp valuation not exceeding 10% of consideration can be treated as full value. Precedent Treatment: The Tribunal relied on earlier judicial decisions holding the increased tolerance band to be a beneficial/curative amendment entitled to retrospective operation (citing Maria Fernandes Cheryl and other authorities). These precedents were followed and applied to allow retrospective effect back to earlier assessment years (noting decisions that applied similar reasoning to section 50C and its provisos). Interpretation and reasoning: The Tribunal treated the 10% tolerance as a beneficial provision. It noted statutory cross-references (third proviso to section 56(2)(vii) referencing section 50C) and consistent judicial treatment that beneficial valuation provisos should be applied retrospectively. On facts, the difference between stamp duty value and DVO valuation (or consideration) fell within 10% tolerance; therefore the difference could not be treated as income under section 56(2)(x). Ratio vs. Obiter: Ratio - the 10% tolerance introduced by Finance Act, 2020 is to be applied retrospectively as a beneficial provision, and where discrepancy is within that tolerance, addition under section 56(2)(x) cannot be sustained. Obiter - general commentary about the introduction history of provisos to section 50C and their beneficial nature. Conclusion: The 10% tolerance band applies retroactively; the discrepancy on the facts is within 10%, so the addition under section 56(2)(x) is deleted and the revenue ground is dismissed. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Allowability of depreciation under section 32 where interior works carried out post-registration; whether asset was 'put to use' Legal framework: Depreciation under section 32 is allowable where an asset is used for the purpose of business or profession; timing is linked to asset being 'put to use' (possession/actual use). Burden of proof on assessee to demonstrate use/possession; revenue can verify through enquiries and documents including possession letters. Precedent Treatment: The Tribunal noted inconsistent positions in departmental treatment (acceptance of reduced WDV in a subsequent year) and absence of requisite documentary proof at earlier stage. No contrary precedent was overruled; instead the Tribunal directed factual verification. Interpretation and reasoning: The Tribunal observed that the assessee undertook interior works after registration and claimed depreciation; the Assessing Officer disallowed depreciation on the basis of 'passive use' pending interiors and absence of letter of possession. The Tribunal noted factual inconsistencies: subsequent year's acceptance of capital gains based on WDV that reflects the depreciation claimed, and lack of further verification by the Assessing Officer (notice under section 133(6) unanswered). Given these material factual disputes and absence of full verification, the Tribunal concluded that the question of actual possession/use required factual inquiry. Ratio vs. Obiter: Ratio - where factual disputes exist about possession/use and the record shows inconsistent departmental treatment, the matter should be remitted to the Assessing Officer for limited verification rather than being decided summarily on first appeal. Obiter - observations indicating that possession, if demonstrable, entitles the assessee to depreciation. Conclusion: The depreciation issue is remitted to the Assessing Officer for limited purpose of verifying possession and related facts, with opportunity to the assessee to be heard; the assessee's ground is allowed for statistical purposes pending verification. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Disallowance under section 40A(2)(b) of incremental rent paid to a director absent independent verification Legal framework: Section 40A(2)(b) disallows remuneration or interest or other sums paid to related persons in excess of reasonable amounts; the provision contemplates objective verification and evidence to support excess payment findings. Precedent Treatment: The Tribunal required objective documentary proof and independent examination before sustaining disallowance under section 40A(2)(b). No authority was overruled; the approach follows principles that factual verification is necessary before treating related-party payments as excessive. Interpretation and reasoning: The Assessing Officer treated an incremental rent (increase from yearly Rs. 1,00,000 to Rs. 1,20,000) as excess without independent verification or documentary evidence demonstrating that the incremental amount was excessive. The Tribunal found absence of material on record to justify disallowance and therefore directed remand for limited verification of documentary evidence and objective assessment on the excessness of rent, allowing the assessee opportunity to be heard. Ratio vs. Obiter: Ratio - disallowance under section 40A(2)(b) cannot be sustained without objective verification/documentary evidence showing excess payment vis-à-vis the terms and market or other relevant benchmarks; where such matter is not examined the issue must be remitted for verification. Obiter - none beyond procedural admonition to verify and hear the assessee. Conclusion: The rent disallowance is set aside for verification; matter remitted to the Assessing Officer with directions to examine documentary evidence and afford opportunity of hearing; assessee's ground is allowed for statistical purposes.